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Saturday, February 22, 2014

KCON9: First Saturday Morning Session

I had the pleasure of chairing a panel populated by four young scholars all writing on Behavior, Bargaining, Incentives and Contract.

ChingKenneth Ching went first with his paper on Justice and Harsh Results: Beyond Individualism and Collectivism in Contracts.  His paper focused on Cardozo's celebrated opinion in Jacob & Youngs v. Kent in which Cardozo held that, although Jacob & Youngs had not installed Reading pipes as called for in the contract, it had nonetheless substantially performed the contract by installing pipes of similar quality.  Professor Ching maintains that Cardozo was wrong on both the facts and the law in the case.  The contract in the case made clear that complete performance was a condition of payment, and the law was clear (then and now) that there can be no substantial performance of a condition.  Moreover, even if it were possible to substantially perform conditions, Jacob & Youngs did not do so, as Cardozo would have noted had he actually applied the test to the facts of the case.

The case is but a gateway to Professor Ching's larger point about collectivist and individualist approaches to contracts law.  Judge Cardozo's opinion seems to take a collectivist (or parternalist) approach to the doctrinal problems that the case raises.  That is, Cardozo thinks we are all better off if people aren't held to unreasonable terms that would require the destruction of a home to replace pipes with virtually identical pipes.  Judge McLaughlin's dissent seems to be more individualist, focusing on Kent's perspective and his right to insist on the contracts rights for which he had bargained.  Professor Ching's approach rejects both collectivist and individualist approaches.  He favors a Thomist approach that  tries to resolve conflict in line with reason and with the goal of promoting human flourishing.  Cardozo's opinion might be attractive from a Thomist perspective. Responding to a question, Professor Ching acknowledged that James Gordely, whose approach informs Professor Ching's, would find for Jacob & Youngs based on unconscionability.  Still, Professor Ching maintains, Judge Cardozo reached the wrong result because of his mischaracterization of the facts and the law.

VersteaNext up was Andrew Verstein who gave a (his first ever) Prezi presentation (which was super cool) on Ex Tempore Contracting.  His paper takes on a tradition that distinguishes between ex ante and ex post approaches to contracts interpretation.  In the former, the parties specify how the contract is to be interpreted ("use Reading pipes"), and in the latter, the parties delegate  interpretation to an adjudicator ("use merchantable pipes").  In the ex ante approach, the parties determine the meaning of the terms; in the ex post approach, some neutral third party (court or arbitrator) determines the meaning.  Ideally, parties decide between precise (ex ante) terms and vague (ex post) terms based on the costs and benefits of choosing specific terms in particular contexts.  Parties should draft to minimize the sum of ex ante  and ex post costs.   

But Professor Verstein contends that there is middle ground between before performance and after (alleged) breach.  Some contracts disputes can be resolved during performance.  The parties can specify that a particular third party will resolve disputes that arise during performance (ex tempore), and they can be resolved whether the terms are superficially vague or superficially precise.  The aim remains to reduce the costs of dispute resolution, and there are many situations in which it is most efficient for the parties to agree to ex tempore dispute resolution, especially in construction agreements.  Professor Verstein illustrates this point with the case of the Chinese Ertan Dam, a huge construction project.  All disputes relating to that dam were resolved within six months of the dam's completion.  This fact is attributable to the existence of netural expert panels (dipute boards) that addressed disputes as they arose and were able to sort out most disputes before the parties became too aggrieved.  Reviewing Florida dispute boards, Professor Verstein finds that 98% of disputes are resolved without further conflict and the cost is 10-50% of arbitration.  This is not really dispute resolution, Professor Verstein contends; it is ex tempore contracting.  And, it turns out, this happens a lot more often than we realize.

Professor Verstein's paper is forthcoming in the William & Mary Law Review and can be downloaded here.

EpsteinWendy Netter Epstein next presented her paper on Public Private Contracting and the Reciprocity Norm.  Professor Epstein's thesis is that in some public private contracts it is very difficult for the government to reduce agency costs by writing more detailed contracts.  Picking up on Professor Verstein's theme, Professor Epstein contends that in certain circumstances it is better to have less detailed contracts with mechanisms for ongoing dispute resolution during contract performance.  This approach is most appropriate where there is a shallow market (i.e., very few private contractors bid), a narrow application (e.g., private prisons) or a disempowered group of third-party beneficiaries (e.g., welfare recipients).  

While a lot of scholarship has focused on the need for more detailed contracts in this context so as to provide for strong oversight of private actors working in the public interest.  Professor Epstein suggests that the result has been to increase the size and complexity of government contracts.  However, this solution does not work well because, where there is no well-functioning market, the government cannot effectively moitor and discipline private contractors.  Moreover, one point of outsourcing is to promote innovation and creativity, and excessive government monitoring of private contractors undermines that aim.  Professor Epstein drawns on research in the behavioral sciences and contends that reciprocity norm, which rewards people for kind actions, constrains actors more powerfully than models based on rational actors would predict.  She thus thinks that strict enforcement mechanisms and sanctions regimes often undermine cooperation in the public private contracting context.  Governments might be better served by communicating their positive intentions towards private contractors by entering into looser contracts that would permit the parties to chart the course of the collaboration on an on-going basis as the project proceeds.

Zacks-webFinally, Eric Zacks presented a paper on The Moral Hazard of Contract Drafting.  One party to a contract can act opportunistically as an economic agent of the other party.   The agency relationship arises when one party asks the other party to draft the agreement.  That is a delegation of authority that would then be ratified upon acceptance.  The danger of agency costs arises in that there may be a disparity between the contract as conceived and the contact as written. 

There may be economic value in having one party be the contract preparer.  For example, that party might have greater experience and expertise in contract preparation.  But the drafter may write the contract is such a way as to enable it to take advantage of the other party after performance has begun.  Then the question arises whether the principal (the non-drafting party) is able to monitor the agent (the drafting party).  For example, in consumer contracts, it seems unlikely that non-drafting consumers would be capable of both foreseeing and monitoring the agency costs involved in allowing sellers to draft consumer contracts.  One solution is for the principal to hire an agent (e.g., a lawyer) to monitor the contract.  Or there might be outside monitoring services to prevent opportunistic behavior, such as regulatory agencies or courts, or statutory requirements that certain transactions be written in plain language.  

Courts are less likely to intervene when they think the principal (non-drafting party) is sophisticated and has the means to protect itself against opportunistic behavior by the agent (drafting party).  In the contractual context, we have more limited ways to discourage opportunistic behavior through incentives for good behavior.  

Those not satisfied with this summary of Professor Zacks' argument can download the entire thing here.

February 22, 2014 in Conferences, Government Contracting, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

Friday, February 21, 2014

KCON 9: Friday Afternoon Session: Contract Interpretation

BayernShawn Bayern presented his work in progress on Meta-contextualist Contract Interpretation.  Although Professor Bayern began by suggesting that, non-withstanding his previous presentations at this conference in which he denounced formalism and defended contextualist approaches, he really thinks that if asked in any given context, which interpretive regime should apply to a particular transaction, his answer is, "it depends."  In short, the answer to the question of textualism vs. contextualism is contextual.  Thus, Professor Bayern is a meta-contextualist.  Parties should be able to determine what interpretive regime will apply to them.  It might well be textualist, but (ah ha!), the text of the parties' agreement should not be dispositive in determining that issue.  Rather, courts should look to the context informing that agreement.   Happily, this seems to be what courts do.  If the parties make clear that they intend to be bound by their text, then courts should take a textual approach.  Otherwise, they should not just rely on the text, regardless how clear it is, but should review the text in the context of the negotiations.  After all, a contract negotiated at gunpoint should not be binding regardless of its clarity.

Gerhart_peterPeter Gerhart then presented his paper co-authored with Juliet Kostritsky, Efficient Contextualism.  The main point of the paper, like Professor Bayern's, is that the distinction between contextual and textual approaches is not particularly useful.  Our real goal is to get at the parties' obligations, and whether we do that with text or context does not really matter.  Both approaches, if pursued one-sidedly, have significant drawbacks.  Textualism can lead to literalism and absurd results.  Contextualism, if unconstrained, can be terribly inefficient and capricious.

Instead Professor Gerhart proposes "efficient contextualism" through determinate reasoning, which requires each party to identify the facts that must be true in order for their interpretation to succeed.  While Professor Bayern thinks that the methodology appropriate to each contract must be determined with specific reference to the context in which that contract was negotiated, Professor Gerhard suggests that there can be a uniform approach to interpretation that would in fact be what unites the law of contracts.  He used the facts of Jacob & Youngs v. Kent to illustrate.  What does "use Reading Pipe" mean in the context of that agreement and what result is surplus maximizing?  The answer depends on what the parties knew or reasonably should have known and intended at the time of the agreement.  Determinate reasoning should promote efficiency by narrowing the issues in dispute which can then be settled either through motion practice or by a quick trial to resolve the few factual disputes on which the parties' differing contractual interpretations hinge.

Amir14Finally, Amir Pichhadze (pictured left in an image from the Yazigallery), an SJD candidate at the University of Michigan whose recent successes have garnered a lot of attention, presented his paper on Transfer Pricing & Contractual Interpretation.  The subject matter of his paper is complex, so I will post an abstract that he has shared with me:

As the OECD’s Transfer Pricing Guidelines (“TPG”) and US Regulations recognize, the contractual terms of a controlled transaction are a ‘relevant circumstance’ (i.e. ‘comparability factor’) that ought to be taken into account when conducting the transfer pricing comparability analysis.

The purpose of this paper is to identify that domestic contractual interpretation law has a critical role in this comparability analysis. Firstly, it makes it possible to ascertain the substance of the terms, as they were intended by the parties. This is essential in order to properly recognized and give effect to the transaction as it was structured by the parties. Second, the parties’ contractual intentions make it possible to determine whether the controlled transaction’s surrounding circumstances are linked to the transfer price, which would make them a ‘relevant circumstance’ in the comparability analysis.

In Canada v. GlaxoSmithKline Inc. (“Glaxo case”), for example, if Glaxo Canada intended in the controlled transaction [which was a Supply Agreement with Adechsa, an associated foreign company] to bundle payments for goods received under the expressed terms of the controlled transaction as well as for services received from its parent company [Glaxo Group, which is located in the UK] under a separate Licence Agreement, then that Licence Agreement would have to be taken into account as a ‘relevant circumstance’ because it is linked to (i.e. it has an impact on) the transfer price.

 Part 1 of this paper identifies that in order to properly ascertain Glaxo Canada’s contractual intentions, in the Supply Agreement, the courts had to interpret that agreement by applying the relevant principles from Canada’s contractual interpretation law. By failing to do so, the courts have risked making an error of law in their analysis. The extent of their error will be explored in part 2 of this paper. The analysis of the courts’ approach in this case ought to serve an important function. It ought to alert courts in other countries to recognize the role that their domestic contractual interpretation law has in the transfer pricing comparability analysis, so that they avoid making the same errors as those made by the Canadian courts.

February 21, 2014 in Conferences, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

KCON 9 Lunch Speaker: Kingsley Martin

Kingsley Martin of KM Standards gave a luncheon address on "The Emergence of Contracts Standards and Its Future Impact on Legal Education."  He introduced us to some very impressive technology that can greatly increase the efficiency with which practicing attorneys review standard agreements.  Here's what it looked like:

Kingsley Martin

This technology enables an attorney to review a new document, say a merger agreement, by comparing it to a database of say 15 similar documents.  It immediately identifies the provisions that are similar to those found in the database, those found in the new document and not in the database, and those not found in the new document but common in other, similar agreements.  An attorney can then quickly pinpoint what is missing from the document and might need to be added and what unusual provisions might regard careful scrutiny.  

More particularly, the technology can also use the database to identify the most common language used in standard provisions and also variations in standard provisions so that one can see the range of how parties work out standard terms and pick out the language that is best suited for a particular deal. 

The steps are to identify the unitary elements of standard form agreements, identify the clauses components and then draft clauses in clear, standard English.  Ultimately, Martin thinks that such the technology can help attorneys negotiate optimal terms.  For example, if you are trying to find optimal compensation in an employment agreement at a public company, you could go on to EDGAR and get all the filings that disclose compensation terms.  The parties then should be able to discern from the data an appropriate compensation package.

How might this affect teaching?  He thinks his basic contracts clauses could be reduced to playing cards.  One might then run various simulations with students (or one could just choose to characterize the exercise as a "game" that they students "play").  The students can then choose and negotiate using the various cards and see if they can work out a satisfactory deal.  Or they may not be able to achieve a satisfactory deal through the use of common terms, and then the challenge is to see if they can draft unique language suitable to their ends.

Anyone interested in seeing what the cards might look like can check them out here.

February 21, 2014 in Conferences, Teaching, Web/Tech | Permalink | Comments (0) | TrackBack (0)

And We're Off!

Jennifer MartinJennifer Martin (picutured at left), who did a simply incredible job putting together this conference, welcomed us this morning to sunny Florida.

We then got under way with a plenary session on the work of Linda Rusch (pictured below at right), the conference's honoree.  Candace Zierdt chaired the session and introduced Louis Higgins from West Academic.  He spoke of how great it has been for him to work with Linda as an author.  He claimed that in working with Linda on about 20 books(!), she has never once missed a deadline.

Amy Boss, whom Stephen Sepinuck recognized as the reigning "Queen of the UCC," then spoke of Linda's career as both an academic and as a law reformer.  Linda read a number of comments from an impressive array of  judges and practitioners who have worked with Linda on law reform projects.  Linda is the type of person whose work often goes unnoticed, because it takes place outside of the spotlight among small groups of extremely well-informed experts on commercial law but often comes to shape both complex federal regulations and state statutes.  People uniformly compliment Linda for her creativity and organization and for her sense of humor.  People are willing to work with Linda on all manner of projects because she is extremely competetent, organized, efficient, approachable and enjoyable to work with.  She clearly understands the theoretical underpinnings of commercial law but she never loses sight of the practical.

RuschNext, Neil Cohen spoke of Linda's constant presence in the firmament of commercial law.  Her work has not been flashy and evanscent.  Rather, she is a steady reminder that there are ways to improve on our work and our understanding of commercial law while also working at improving the law itself.  He commended her for her successful revision of Article 7 and for the "unbuilt architecture" of the revised Article 2 that the ALI approved but then fell at the Uniform Law Commission.   Professor Cohen made the excellent point that the remedies sections in the original Article 2, which are extremely well-conceived, are not especially well drafted.  Linda was significantly involved in reconceptualizing, re-organization and re-writing the Article 2 remedies sections.  The failure of state legislatures to adopt the revised Article 2 is a loss to all of us who teach the subject matter, because the legal principles are far more clearly laid out in the revised version (thanks to Linda's work) than they were in the original.

Larry Garvin spoke of having met Linda early in the process of UCC revision in 1996 and watched her move from back-bencher to leader in undertaking elegant revisions, especially to the Article 2 damages sections.  Professor Garvin basically added his "I agree" to Professor Cohen's comments and then moved on to an appreciation of Linda's scholarly work since the UCC revisions, focusing especially on her article in the SMU Law Review on the ongoing struggle for balance in Article 2 and on Linda's 2003 Temple Law Review article on products liability.  In sum, Professor Garvin noted that Linda's scholarship and law reform efforts generally are characterized by clarity and balance.

Finally, Stephen Sepinuck spoke on behalf of the younger scholars who have benefited from Linda's support and mentoring.  Professor Sepinuck highlighted as his favorite of Linda's articles her 2008 article in the Chicago-Kent Law Review on payment systems.   When the time comes to revisit the laws of payment systems, Professor Sepinuck suggested that this article will provide the basis for that work.  He also noted that the reason very few people know anything about the UCC's Article 7 is that Linda's draft made that section so clear that Article 7 issues almost never need to be litigated.   He also noted her important contributions to the Restatement (3d) of Restitution and Unjust Enrichment so as to make certain that nothing in the Restatement is inconsistent with anything in the UCC.

Linda said a few quick words of thanks to the panelists, whom she had gotten to know at many meetings at mediocre hotels in medium-sized cities close to major airports.  Professor Zierdt announced that the entire panel will be available on YouTube, so that's somethign to look for soon.

February 21, 2014 in Conferences, Contract Profs, Recent Scholarship | Permalink | Comments (0) | TrackBack (0)

LIVE! From Miami

A number of us from the blog are here at KCON 9 in Miami -- the 9th Annual International Conference on Contracts.  We may do some live blogging on the panels, or we may just reflect afterwards on the sessions.  But for now, let's just say, highs in the 80s, lows in the 70s.

South Beach

'Nuf said.

February 21, 2014 in Conferences, Travel | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 19, 2014

“When I get the big money, I’ll take care of you.”

Do such words imply an enforceable promise to give an employee additional compensation both for work already performed and for work to be performed in the future if the speaker actually obtains a sizeable chunk of money?  (Does it matter to your answer if the words were uttered by Heather Mills, famous or infamous ex-wife of Sir Paul McCartney?..)

Your answer to the former question would probably be a resounding “of course not.”  In a recent decision, the United States Court of Appeals for the Ninth Circuit agrees (Parapluie v. Heather Mills, No. 12-55895).  The case resembles such Contracts casebook classics old and new as Kirksey v. Kirksey (1945), Ricketts v. Scothorn (1898) and Conrad v. Fields (2007).  One might have thought that promissory estoppel and, in this case, promissory fraud and intentional misrepresentation claims had generated enough case law to prevent an appeal.  Apparently not, much to the amusement of law students and law professors alike.

At bottom, the facts behind the case against Ms. Mills are as follows: In 2005, Ms. Mills hired Michele Blanchard to conduct PR work for her.  Ms. Blanchard was paid nothing for her work from 2005 to 2007.  In 2007, however, Ms. Mills and Ms. Blanchard agreed that Ms. Blanchard would be paid $3,000 per month because Mills couldn’t pay Blanchard’s usual fee of $5,000 per month.  The payments were made.  In 2008, the relationship between the two women soured.  Ms. Blanchard quit and sent Ms. Mills an additional invoice for $2,000 per month in arrears.  Ms. Blanchard claimed to be entitled to the greater amount because Ms. Mills allegedly misrepresented her financial situation when telling Ms. Blanchard that she could only pay $3,000 a month when she could, allegedly, afford to pay more.  In making this assertion, Ms. Blanchard relied on Ms. Mills having expressed an interest in renting a house for $80,000 per month, having bid $30,000 on a cruise at a charity auction, and having once stated about the fee to Ms. Blanchard, “I don’t know if I can pay the entire amount, but I’ll do something” and, after Ms. Blanchard askeed Ms. Mills if she might pay Ms. Blanchard “a little something,” allegedly agreeing that “I’ll take care of you when I get the big money.”  Ms. Blanchard claims that the latter statement was a promise to pay her regular fee of $5,000 both in the future and for the work already performed.  The court pointed out that Ms. Mills interest in renting expensive housing was just that; an interest.  She had in fact only rented “modest” properties via Ms. Blanchard for $2,000-3,000 per week for one week.  Perhaps most tellingly of Ms. Mills’ financial state of affairs at the time is the fact that when she attempted to pay for the cruise bid with a credit card, the payment was denied. 

Ms. Mills is reported to have obtained a nearly $50 million divorce settlement with a sizeable interim payment around the times listed above.  But as the court pointed out, when Ms. Mills did receive this interim payment, she also started paying Ms. Blanchard $3,000 a month, suggesting that her earlier statements about her inability to pay Blanchard were true, not false, when made.  Ms. Blanchard’s monthly invoices further stated “the total amount due” as $3,000, negating any inference that the contractual parties intended a retroactive or future payment for more than that amount.

Ms. Blanchard’s attorney may have wanted to read Baer v. Chase (392 F.3d 609, U.S. Ct. of App. for the Third Cir. (2004)).  In that case, Robert Baer, a former state prosecutor wishing to pursue a career as a Hollywood writer, similarly claimed that David Chase had promised to “take care of” Baer and “remunerate him in a manner commensurate to the true value of [his services]” should the project on which Baer worked for Chase become a success.  It did: the project was the creation and development of what turned out to be the hit TV series The Sopranos.  Baer received nothing for his services.  The court found that the alleged contract was unenforceable for vagueness because nothing in the record allowed the court to figure out the meaning of “success,” “true value,” and, in general, what it meant to be “taken care of” in this context.

Potentially starstruck employees be ware: if you think that your employer promises you a chunk of money, make sure you find out exactly what you have to do to earn that.  Now as well as hundreds of years ago: alleged promisors are unlikely to simply “take care of you” out of the goodness of their hearts.  And as always: get the promise in writing!

February 19, 2014 in Contract Profs, Famous Cases, In the News | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 18, 2014

Good day, Sir! Contract Prevents University Student From Receiving $10k Prize

During a basketball game at West Chester University in Pennslyvania, freshman Jack Lavery was randomly picked for the $10,000 halftime challenge.  Lavery had 25 seconds to make a lay-up, shot from the free throw line, shot behind the three-point line and a half-court shot. Lavery successfully made a lay-up, a shot from the behind the free throw line, and then a shot behind the three-point line.  As the clock was winding down, Lavery attempted the half-court shot, but missed.  With one hand, he made the half-court shot on his second attempt just as the buzzer went off.  As Lavery explains it:

"I stopped and did that one handed shot and it happened to go in. I ran to the other side of the court just high fiving everyone and then I went and bear hugged my dad," said Lavery.

See for yourself:

 As you see, the crowd cheered, but the University refused to award the prize money.  Why?  The contract.

Intrepid reporting by Action News obtained a copy of a contract signed by Lavery.  The rules of the contest provide:

I shall have as many opportunities as necessary at each of the first three (3) locations to make a shot; however, no more than ONE (1) attempt may be made at the HALF COURT shot, provided that there is still time left on the shot clock.

Lavery took more than one attempt at the half court shot and, therefore, the University claims that he is inelgible for the prize.  Nevertheless, apparently his father intends to "challenge the wording of the contract."

Additionally, the contract reportedly states that anyone who played basketball in high school would be ineligible to collect the prize money.  Lavery played high school ball, another reason for his ineligibility.

Reminds me of this:

February 18, 2014 in In the News, Sports | Permalink | Comments (0) | TrackBack (0)

A Conference to Honor Chuck Knapp

Save the Date:  Symposium to Honor Professor Chuck Knapp’s

50th Year of Law Teaching – October 24, 2014

  KnappThe University of California, Hastings College of the Law is sponsoring a symposium to honor Professor Chuck Knapp on the completion of his 50th year of law teaching.  (He began his teaching career at NYU School of Law in fall 1964.)  The date for the event is Friday, October 24, 2014, and it will be held on the campus of UC Hastings in San Francisco.  

The day-long program will include four panels that will focus on areas that are of particular interest to Professor Knapp, but that will also address topics with broad appeal to contract law scholars. The panel topics include:  

*The State of Contract Law

*The Future of Unconscionability as a Limit on Contract Enforcement

*The Politics of Contract Law

*The Role of Casebooks in the Future of Contract Law

Confirmed speakers include:

  • Professor Hazel Glenn Beh, University of Hawaii
  • Professor Carol Chomsky, University of Minnesota
  • Professor Jay Feinman, Rutgers University – Camden
  • Professor Danielle Kie Hart, Southwestern Law School
  • Professor David Horton, UC Davis
  • Professor Emily M. S. Houh, University of Cincinnati
  • Professor Thomas Joo, UC Davis
  • Professor Russell Korobkin, UCLA
  • Professor Peter Linzer, University of Houston
  • Professor Judith Maute, University of Oklahoma
  • Professor Deborah Post, Touro Law Center
  • Professor William Woodward, Temple University

Questions may be directed to Professor Harry G. Prince at UC Hastings by email at [email protected] and by telephone at 415-565-4790.

February 18, 2014 in Conferences, Contract Profs | Permalink | TrackBack (0)

Weekly Top Tens from the Social Science Research Network

SSRNRECENT TOP PAPERS for all papers first announced in the last 60 days 
20 Dec 2013 to 18 Feb 2014

RankDownloadsPaper Title

1 204 The Two-Contract Approach to Liquidated Damages: A New Framework for Exploring the Penalty Clause Debate 
Michael Pressman 
University of Southern California 
2 179 An Economic Theory of Fiduciary Law 
Robert H. Sitkoff 
Harvard Law School 
3 131 Executive Benefits Insurance Agency V. Arkison: Does Party Consent Render Bankruptcy Court Adjudication Constitutionally Valid? 
Elizabeth GibsonJonathan M. Landers 
University of North Carolina (UNC) at Chapel Hill - School of Law, Scarola Malone & Zubatov LLP
4 124 Non-State Law in the Hague Principles on Choice of Law in International Contracts 
Ralf Michaels 
Duke University - School of Law 
5 114 Limits of Procedural Choice of Law 
S.I. Strong 
University of Missouri School of Law
6 92 Promises and Expectations 
Florian EdererAlexander Stremitzer 
Yale University - School of Management, UCLA School of Law
7 73 Zombie Mortgages, Real Estate, and the Fallout for the Survivors 
David P. Weber 
Creighton University - School of Law 
8 70 Forward: Review of Baird, Eisenberg & Bix on Contract Doctrine 
Lisa Esther Bernstein 
University of Chicago - Law School 
9 68 Unpopular Contracts and Why They Matter: Burying Langdell and Enlivening Students 
Jennifer Taub 
Vermont Law School 
10 53 Mandatory Rules and Default Rules in Insurance Contracts 
Kyle D. LogueTom Baker 
University of Michigan Law School, University of Pennsylvania Law School

RECENT TOP PAPERS for all papers first announced in the last 60 days  
20 Dec 2013 to 18 Feb 2014

RankDownloadsPaper Title

1 201 The Two-Contract Approach to Liquidated Damages: A New Framework for Exploring the Penalty Clause Debate 
Michael Pressman 
University of Southern California 
2 124 Non-State Law in the Hague Principles on Choice of Law in International Contracts 
Ralf Michaels 
Duke University - School of Law 
3 92 Promises and Expectations 
Florian EdererAlexander Stremitzer 
Yale University - School of Management, UCLA School of Law 
4 70 Forward: Review of Baird, Eisenberg & Bix on Contract Doctrine 
Lisa Esther Bernstein 
University of Chicago - Law School 
5 68 Unpopular Contracts and Why They Matter: Burying Langdell and Enlivening Students 
Jennifer Taub 
Vermont Law School 
6 53 Mandatory Rules and Default Rules in Insurance Contracts 
Kyle D. LogueTom Baker 
University of Michigan Law School, University of Pennsylvania Law School 
7 50 Crowding In: How Formal Sanctions Can Facilitate Informal Sanctions 
Scott BakerAlbert H. Choi 
Washington University in Saint Louis - School of Law, University of Virginia School of Law 
8 42 Are You Free to Contract Away Your Right to Bring a Negligence Claim? 
Scott J. Burnham 
Gonzaga University School of Law 
9 33 Cases and Controversies: Some Things to Do with Contracts Cases 
Charles L. Knapp 
University of California - UC Hastings College of the Law 
10 30 A Proposal in Equity: The Marriage of Undue Influence with Unconscionable Dealing? 
Hamilton Zhao 
University of New South Wales (UNSW) - UNSW Law Student

February 18, 2014 in Recent Scholarship | Permalink | TrackBack (0)

Monday, February 17, 2014

GLOBAL K: Empirically Speaking

Genuine, rigorous empirical analysis is always welcome in Contracts scholarship. It not only gives context to abstract principles, but also reminds us what is at stake. One of my favorite examples of empirical analysis in Contracts is Peter L. Fitzgerald’s 2008 article The International Contracting Practices Survey Project: An Empirical Study of the Value and Utility of the United Nations Convention on the International Sale of Goods (CISG) and the UNIDROIT Principles of International Commercial Contracts to Practitioners, Jurists, and Legal Academics in the United States. This is where many of us learned – or had our suspicions confirmed – that many practitioners and most judges were ignorant of the UN Convention on Contracts for the International Sale of Goods. In a broad 2006-2007 survey sampling practitioners, law professors, and state and federal judges in California, Florida, Hawaii, Montana, and New York, Professor Fitzgerald noted that U.S. practitioners reported relatively low levels of familiarity with the CISG (30 percent of reporting practitioners).  Even more alarming was his finding that 82 percent of reporting judges indicated that they were “not at all familiar” with the CISG.

 

A fresh and thought-provoking example of empirical analysis has recently appeared, and every Contracts scholar and practitioner should be aware of it. Dysfunctional Contracts and the Laws and Practices That Enable Them: An Empirical Analysis features two empirical studies and an experiment that seem to have significant policy implications for contract law and consumer protection policy as applied to real estate transactions. These were designed and conducted by Professor Debra Pogrund Stark of John Marshall Law School, Dr. Jessica M. Choplin, a psychology professor at DePaul University, and Eileen Linnabery, a graduate student in industrial/organizational psychology at DePaul University.

 

The authors reviewed form purchase agreements used by condominium developers in Chicago, Illinois from 2003-2008, and found that 79 percent of the agreements contained what the authors considered “highly unfair, one-sided remedies clauses.” The form agreements provided that in the event of seller's breach, buyer's sole remedy was the return of the earnest money deposit., which did not cover any of the losses that would normally be the basis for relief in a breach of contract action, whether expectation damages, consequential damages, or reliance damages, or specific performance where that might have otherwise been warranted. In contrast, the contracts provided that in the event of buyer's breach, seller could retain buyer's deposit, typically between 5 and 10 percent of the purchase price. A survey of over one hundred attorneys in Illinois conducted by Professor Stark appears to corroborate the view that there were “serious problems with remedies clauses” in agreements like those in the Condo Contracts Study. The authors argue that these “dysfunctional contracts,” where the relatively more sophisticated party could deliberately default and terminate the contract with virtually no harm to itself, rendered the contracts “no true binding agreement from that party,” in effect unconscionable or illusory. It appears, however, that only a few Florida cases like Blue Lakes Apts., Ltd. v. George Gowing, Inc. and Port Largo Club, Inc. v. Warren have ruled such contracts to be illusory, whereas most state courts looking at the issue have so far rejected that argument.

 

One might wonder about the extent to which courts are influenced by the assumption that these were bargained-for terms, and to that extent should escape such attacks. The authors have something to say about this. They ran a “Remedies Experiment” to gauge non-lawyer awareness of the imbalance of such remedy clauses. They found what they considered “a widespread failure of the participants to understand the impact of this type of clause on their rights after a breach.” This empirical insight might put into question the assumption in many unconscionability cases that buyer understands the clear wording of such clauses and in fact bargained for the result. If this is simply not true – and if the contrary assumption is being relied upon strategically by professional sellers – then perhaps the traditional unconscionability test needs to be rebooted in the real estate development context.

 

The authors conclude that buyers need greater protection, and they advocate four legal reforms in this regard. First, they recommend revision of unauthorized practice of law rules to require attorney review and approval of home purchase contracts, specifically by attorneys specially trained and licensed for this type of representation. Second, they recommend legislation to prohibit remedies clauses that limit buyer remedies to return of deposit and that create safe harbor rules based on mutuality of remedy and true bargaining in the home purchase contract. Third, they argue for the replacement of the substantive unconscionability test for limitation-of-remedies clauses with a “reasonable limitation of remedy” test in the home purchase context. Finally, they recommend legislation mandating award of attorneys’ fees to the prevailing party in litigation involving enforcement of rights in the context of home purchase agreements.

 

Regardless of one’s assessment of the desirability of these suggested reforms – or of their practical and political possibility – the analysis in Dysfunctional Contracts is rigorous, provocative, and compelling. This is a “must read” piece of Contracts scholarship.

 

 

Michael P. Malloy

February 17, 2014 in Commentary, Recent Scholarship | Permalink | TrackBack (0)

Boilerplate and Children: O tempora o mores

Bumper CarsThis afternoon, since school is out (for reasons that are unclear to us), my daughter is going with a group to a "famly fun center" featuring laser tag, a laser maze, go carts, bumper cars and something called the Sky Trail.  The organization that is arranging the group outing sent me the fun center's standard waiver form which, not surprisingly these days, states that I waive any claims I might have against the fun center for, among other things,  serious  injury, including the death of my daughter while she does whatever one does on a Sky Trail, even if that serious injury or death is the result of the fun center's negligence.  

I took the liberty of crossing out the offensive language, which I would hope would be unenforceable in any case.  Since I will not be with my daughter when she hands in the waiver form, there will be nothing to do if the fun center refuses to accept it, but I am counting on them not noticing.  I guess I will find out when she gets home and either tells me how awesome the Sky Trail was or slams her door and doesn't speak to me for a week.

The truth is, if my daughter were killed due to the fun center's negligence, a law suit would not improve my life in any way, help me heal or make me feel somehow that justice had been done.  Wrangling over responsibility for her death would only prolong the agony of losing a child.  Still, I cannot sign the form as is and it seems farcical to me to suggest that any parents would  really want to turn their children over to the custody of strangers and then pardon those strangers in advance for their deadly negligence. 

February 17, 2014 in Commentary, True Contracts | Permalink | Comments (0) | TrackBack (0)

Teaching Conference at the University of Arkansas at Little Rock

Assessment Across The Curriculum

Institute for Law Teaching and Learning

Spring Conference 2014

Saturday, April 5, 2014 

“Assessment Across the Curriculum” is a one-day conference for new and experienced law teachers who are interested in designing and implementing effective techniques for assessing student learning.  The conference will take place on Saturday, April 5, 2014, at the University of Arkansas at Little Rock William H. Bowen School of Law in Little Rock, Arkansas. 

Conference Content:  Sessions will address topics such as

  • ·         Formative Assessment in Large Classes
  • ·         Classroom Assessment Techniques
  • ·         Using Rubrics for Formative and Summative Assessment
  • ·         Assessing the Ineffable: Professionalism, Judgment, and Teamwork
  • ·         Assessment Techniques for Statutory or Transactional Courses

By the end of the conference, participants will have concrete ideas and assessment practices to take back to their students, colleagues, and institutions. 

Who Should Attend:  This conference is for all law faculty (full-time and adjunct) who want to learn about best practices for course-level assessment of student learning.

Conference Structure:  The conference opens with an optional informal gathering on Friday evening, April 4.  The conference will officially start with an opening session onSaturday, April 5, followed by a series of workshops.  Breaks are scheduled with adequate time to provide participants with opportunities to discuss ideas from the conference.  The conference ends at 4:30 p.m. on Saturday.  Details about the conference are available on the websites of the Institute for Law Teaching and Learning (www.lawteaching.org) and the University of Arkansas at Little Rock William H. Bowen School of Law (ualr.edu/law).  

Conference Faculty:  Conference workshops will be taught by experienced faculty, including Michael Hunter Schwartz (UALR Bowen), Rory Bahadur (Washburn), Sandra Simpson (Gonzaga), Sophie Sparrow (University of New Hampshire), Lyn Entrikin (UALR Bowen), and Richard Neumann (Hofstra).

Accommodations:  A block of hotel rooms for conference participants has been reserved at The DoubleTree Little Rock, 424 West Markham Street, Little Rock, AR 72201.  Reservations may be made by calling the hotel directly at 501-372-4371, calling the DoubleTree Central Reservations System at 800-222-TREE, or booking online at www.doubletreelr.com.  The group code to use when making reservations for the conference is “LAW.” 

February 17, 2014 in Conferences | Permalink | TrackBack (0)

Friday, February 14, 2014

Thank You For Your Patience

We at the ContractsProf appreciate your readership.  Unfortunately, all of our bloggers are occupied at this time binging on Season 2 of House of Cards.  Readers may stare at their screens, visit the TaxProf Blog or any other blog on the Law Professor Blog Network, or pass Valentine's Day by doing whatever it takes to get a free crib from Ikea (hat tip to Rachel Arnow-Richman).

Test Pattern

We will resume blogging shortly.  

Thank you for your patience. 

February 14, 2014 in About this Blog, Television | Permalink | Comments (0) | TrackBack (0)

Thursday, February 13, 2014

A Couple of UCC Statute of Frauds Cases

This is the third in a series of posts commenting on the cases cited in Jennifer Martin's summary of developments in Sales law published in The Businss Lawyer.

Professor Martin discusses two Statute of Frauds (SoF) cases.  The first, Atlas Corp. v. H & W Corrugated Parts, Inc. does not cover any new territory.  The second, E. Mishan & Sons, Inc., v. Homeland Housewares, LLC, raises more interesting issues and is a nice illustration of the status of e-mails as "writings" for the purposes of the SoF.  The latter does not seem to be available on the web, but here's the cite: No. 10 Civ. 4931(DAB), 2012 WL 2952901 (S.D.N.Y. July 16, 2012). 

 In the first case, Atlas Corp. (Atlas) sold corrugated sheets and packaging products to H & W Corrugated Parts, Inc. (H&W).  Atlas invoiced H&W for $133,405.24, but H&W never paid.  Eventually, Atlas sued for breach of contract.  H&W never answered the complaint, and Atlas moved for summary judgment.  Although the motion was unopposed, the court considered whether the agreement was within the SoF, as the only writings in evidence were the invoices, which were not signed by the parties against whom enforcement was sought.  Having had a reasonable opportunity to inspect the goods and not having rejected them, H&W is deemed to have received and accepted the goods, bringing the agreement within one of the exceptions to the SoF, 2-201(3)(c).  The contract is thus enforceable notwithstanding the SoF, and H&W, not having paid for the goods, is liable for breach.

Blender
Not the Magic Bullet Blender

Homeland Housewares LLC (Homeland) manufactures the Magic Bullet blender.  Homeland entered into an agreement with E. Mishan & Sons, which the Court refers to as "Emson," granting Emson the exclusive right to sell Magic Bullet blenders (not pictured at left) in the U.S. and Canada.  Between March 2004 and March 2009, Emson ordered well over 1 million blenders from Household.  Although the price fluctuated, it was generally about $21/blender, and Emson paid a 25% up-front deposit.  After 2006, the parties operated without a written agreement.

In 2008-2009, the parties agreed to change their arrangement.  Household sold directly to Bed, Bath & Beyond, Costco and Amazon, but Emson sought to remain as exclusive distributor to all other retailers.  Emson alleges that the parties reached an oral agreement for a three year deal, the details of which were included in an e-mail confirmation that Emson sent on April 2, 2009.  Homeland's principal responded the same day in an e-mail stating that Homeland "will need to add some provisions to this. We will [g]et back to you .” Although further discussions ensued, the parties dispute whether the disputed terms were material.  

In any case, the parties continued to perform.  Emson sought a per unit price reduction as called for in the e-mail confirmation.  Homeland refused, citing increased costs.  Emson did not push the point.  That fact might suggest awareness that there was no binding agreement, or it might just suggest a modification of the existing agreement, which is permissible without consideration under UCC 2-209 so long as the parties agree to it.  In March 2010, Emson learned that Homeland was soliciting direct sales to retailers.  The parties tried to hammer out a new deal but the negotiations failed.  By June 2010, Homeland had taken over all sales of the Magic Bullet in the U.S. and Canada.

Magic Bullet
Actual (alleged) magic bullet

Emson sued, and Homeland moved for summary judgment, claiming that the parties had no contract because the SoF bars enforcement of any alleged oral agreement for the sale of goods in excess of $500. 

As I have remarked before, I find it curious that courts automatically apply the UCC to distributorship agreements.  In this case, if I understand how the transaction worked, Emson may have operated as a bailee for goods that it passed on to retailers.  Since it was dealing with large merchants, it likely would only order blenders that it already intended to pass on to merchants.  It was basically just a broker.  The court might well find that, because of assumption of risk and perhaps other matters, this agreement was in fact one in which goods were sold from Homeland to Emson and then again from Emson to retailers.  But it is also possible that the goods passed through Emson and went straight to the retailers, in which case, I'm not sure the UCC should apply.  But the parties agreed that the UCC applies to distributorship agreements and the court went along with that.  Whatever.

Relying on the merchant exception to the SOF in UCC 2-201(2), Emson characterizes its April 2, 2009 e-mail as a written confirmation sent to a merchant, recieved and not objected to within 10 days.  If that exception applies, the parties had a binding agreement.  But Homeland argues that its response, referencing additional provisions, was a sufficient objection to take it outside of the ambit of the exception.  The court did not resolve that issue but found that material questions of fact remained.  The court denied Homeland's motion for summary judgment.

 

February 13, 2014 in Commentary, E-commerce, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 12, 2014

New in Print

Pile of BooksFabrizio Cafaggi, The Regulatory Functions of Transnational Commercial Contracts: New Architectures, 36 Fordham Int'l L.J. 1557 (2013) 

Jianlin Chen, Challenges in Designing Public Procurement Linkages: A Case Study of SMEs Preference in China's Government Procurement, 30 UCLA Pac. Basin L.J. 149 (2013)

Maksymilian Del Mar, Exemplarity and Narrativity in the Common Law Tradition, 25 Law & Lit. 390 (2013)

Daniel M. Isaacs, Hypothetical Efficiency Is not Grounds for Breach, 116 W. Va. L. Rev. 363 (2013)

Steven L. Schooner, Reflections on Comparative Public Procurement Law, 43 Pub. Cont. L.J. 1 (2013) 

Pedro Telles, The Good, the Bad, and the Ugly: The EU's Internal Market, Public Procurement Thresholds, and Cross-Border Interests, 43 Pub. Cont. L.J. 3 (2013)

Julian Velasco, Fiduciary Duties and Fiduciary Outs, 21 Geo. Mason L. Rev. 157 (2013)

February 12, 2014 in Government Contracting, Recent Scholarship | Permalink | TrackBack (0)

Tuesday, February 11, 2014

Got It? The Challenges of Understanding “Legalese” and “Businessese”

If you applied for credit, but got turned down with the reason “Your worst bankcard or revolving account status is delinquent or derogatory,” would you understand what that means?

Probably not, at least not for sure.  Under the Dodd-Frank Act, lenders are required to send applicants written explanations of why they are denied credit outright or given less favorable terms than those for which they applied.  This requirement is aimed at helping consumers understand what they need to do to improve their credit scores.  But many of the explanations provided to consumers are drafted by the credit score developers themselves and use confusing terminology or are too short to be useful. 

What’s worse: lenders are aware of this problem, but apparently choose to do nothing about it.  According to one survey, 75% of lenders “worry” that consumers don’t understand the disclosure notices.  Only 10% of lenders said that their customers understand reason codes “well.”  This problem is, of course, not isolated to the credit industry, but also prevails in the health care industry and beyond.

Contracts law is not helpful for consumers in this respect either: there is a clear duty to read and understand contracts, even if they are written in a language (typically English) that one does not understand.  Perhaps that’s why only 10% of lenders bother to translate documents into Spanish with the effect that many Spanish-speaking monolingual applicants are unable to read the explanations at all.

Some companies offer websites offering “translations” into easier-to-understand and longer explanations of the codes behind credit refusals and what one can do to improve credit.  There’s a website for almost anything these days, but for that solution to be sufficiently helpful in the lending context, it must be presumed that these websites are relatively easy to find, free or inexpensive, and easy to use; all quite far from always the case. 

As law professors, most of us probably require our students to write in clear, plain English.  We don’t take it lightly if they write incomprehensible sentences.  The desirability of writing well should be obvious in corporate as well as academic contexts. 

February 11, 2014 in Contract Profs, Current Affairs, True Contracts | Permalink | Comments (0) | TrackBack (0)

A NY Court Finally Holds that Florida is "Truly Obnoxious"...

Sunshine-state... at least, Florida's non-compete law is "truly obnoxious" to New York public policy.  The intermediate appellate court in New York (Fourth Department) recently refused to enforce a Florida choice of law provision in a non-compete agreement. Here's the analysis:

We nevertheless conclude that the Florida choice-of-law provision in the Agreement is unenforceable because it is “ ‘truly obnoxious’" to New York public policy (Welsbach, 7 NY3d at 629). In New York, agreements that restrict an employee from competing with his or her employer upon termination of employment are judicially disfavored because “ ‘powerful considerations of public policy . . . militate against sanctioning the loss of a [person’s] livelihood’ ” (Reed, Roberts Assoc. v Strauman, 40 NY2d 303, 307, rearg denied 40 NY2d 918, quoting Purchasing Assoc. v Weitz, 13 NY2d 267, 272, rearg denied 14 NY2d 584; see Columbia Ribbon & Carbon Mfg. Co. v A-1-A Corp., 42 NY2d 496, 499; D&W Diesel v McIntosh, 307 AD2d 750, 750). “So potent is this policy that covenants tending to restrain anyone from engaging in any lawful vocation are almost uniformly disfavored and are sustained only to the extent that they are reasonably necessary to protect the legitimate interests of the employer and not unduly harsh or burdensome to the one restrained” (Post v Merrill Lynch, Pierce, Fenner & Smith, 48 NY2d 84, 86-87, rearg denied 48 NY2d 975 [emphasis added]). The determination whether a restrictive covenant is reasonable involves the application of a three-pronged test: “[a] restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public” (BDO Seidman v Hirshberg, 93 NY2d 382, 388-389 [emphasis omitted]). “A violation of any prong renders the covenant invalid” (id. at 389). Thus, under New York law, a restrictive covenant that imposes an undue hardship on the restrained employee is invalid and unenforceable (see id.). Employee non-compete agreements “will be carefully scrutinized by the courts” to ensure that they comply with the “prevailing standard of reasonableness” (id. at 388-389).

By contrast, Florida law expressly forbids courts from considering the hardship imposed upon an employee in evaluating the reasonableness of a restrictive covenant. Florida Statutes § 542.335(1) (g) (1) provides that, “[i]n determining the enforceability of a restrictive covenant, a court . . . [s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought” (emphasis added). The statute, effective July 1, 1996, also provides that a court considering the enforceability of a restrictive covenant must construe the covenant “in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement” and “shall not employ any rule of contract construction that requires the court to construe a restrictive covenant narrowly, against the restraint, or against the drafter of the contract” (§ 542.335 [1] [h]; see Environmental Servs., Inc. v Carter, 9 So3d 1258, 1262 [Fla Dist Ct App]). Thus, although the statute requires courts to consider whether the restrictions are reasonably necessary to protect the legitimate business interests of the party seeking enforcement (see § 542.335 [1] [c]; Environmental Servs., Inc., 9 So3d at 1262), the statute prohibits courts from considering the hardship on the employee against whom enforcement is sought when conducting its analysis (see Atomic Tattoos, LLC v Morgan, 45 So3d 63, 66 [Fla Dist Ct App]).

Based on the foregoing, we conclude that Florida law prohibiting courts from considering the hardship imposed on the person against whom enforcement is sought is “ ‘truly obnoxious’ ” to New York public policy (Welsbach, 7 NY3d at 629), inasmuch as under New York law, a restrictive covenant that imposes an undue hardship on the employee is invalid and unenforceable for that reason (see BDO Seidman, 93 NY2d at 388-389). Furthermore, while New York judicially disfavors such restrictive covenants, and New York courts will carefully scrutinize such agreements and enforce them “only to the extent that they are reasonably necessary to protect the legitimate interests of the employer and not unduly harsh or burdensome to the one restrained” (Post, 48 NY2d at 87; see BDO Seidman, 93 NY2d at 388-389; Columbia Ribbon & Carbon Mfg. Co., 42 NY2d at 499; Reed, 40 NY2d at 307; Purchasing Assoc., 13 NY2d at 272), Florida law requires courts to construe such restrictive covenants in favor of the party seeking to protect its legitimate business interests (see Florida Statutes § 542.335 [1] [h]). 

According to the NYLJ, courts in Alabama, Georgia and Illinois have also rejected the Florida law.

You know what else is truly obnoxious?  All of the Floridians who complain about how cold it is when it hits 55 degrees...

Brown & Brown v. Johnson (N.Y. App. Div. 4th Dep't Feb. 7, 2014)

February 11, 2014 in In the News, Labor Contracts, Recent Cases | Permalink | Comments (0) | TrackBack (0)

Is a Contract for Roof Repair Covered by the UCC's Article 2?

This is the second in a series of posts commenting on the cases cited in Jennifer Martin's summary of developments in Sales law published in The Businss Lawyer.

Roof_diagramYesterday, we reviewed a case in which a contract for installation of a home entertainment system was deemed to be a contract for the sale of goods.  Well, what about a roof installation contract?  The agreement in question in Buddy’s Plant Plus Corp. v. CentiMark Corp. was labeled a Sales Agreement.  It provided that Centimark would intall a 10-year acrylic coating to the roofs of nine buildings belonging to Buddy's Plant Plus (Buddy's).  After CeniMark completed the work, the roof leaked, and despite years of attempted repairs, the leaks persisted.  Eventually, Buddy's brought suit, which after a change of venue, ended up in the District Court for the Western District of Pennsylvania.  Buddy's alleged breaches of various warranties, breach of contract and fraudulent misrepresentation.  

The court found the parol evidence rule barred the introduction of evidence relating to Buddy's fraudulent misrepresentation claim, so that claim was dismissed.  The court also dismissed Buddy's breach of express and implied warranties claims to the extent that they sounded in the UCC.  Applying the predominant purpose test, the court found that the Sales Agreement was in fact a contract for services and not a contract for the sale of goods.  

It turns out that there is a body of law on roofing contracts, and the authorities weigh heavily in favor of treating such contracts as predominantly involving services.  This case was a bit different, since CentiMark did not install a new roof; it installed an acrylic coating.  Still, the court found that the coating was incidental to the predominant purpose of the contract, which was the installation of a new roofing system.

The case was permitted to proceed on Buddy's breach of contract claim and on its claim that CentiMark violated the warranty to perform in a workmanlike manner.  

February 11, 2014 in Recent Cases | Permalink | Comments (0) | TrackBack (0)

Weekly Top Tens from the Social Science Research Network

SSRNRECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of Contracts & Commercial Law eJournal 

December 12, 2013 to February 10, 2014

RankDownloadsPaper Title
1 204 Where the FCRA Meets the FDCPA: The Impact of Unfair Collection Practices on the Credit Report 
Mary Spector
Southern Methodist University - Dedman School of Law
2 171 An Economic Theory of Fiduciary Law 
Robert H. Sitkoff
Harvard Law School
3 158 The Contract Management Body of Knowledge: Understanding an Essential Tool for the Acquisition Profession 
Steven L. SchoonerNeal J Couture
George Washington University - Law School, George Washington University - Law School
4 145 The Two-Contract Approach to Liquidated Damages: A New Framework for Exploring the Penalty Clause Debate 
Michael Pressman
University of Southern California
5 129 Executive Benefits Insurance Agency V. Arkison: Does Party Consent Render Bankruptcy Court Adjudication Constitutionally Valid? 
Elizabeth GibsonJonathan M. Landers
University of North Carolina (UNC) at Chapel Hill - School of Law, Scarola Malone & Zubatov LLP,
6 105 Whither Symmetry? Antitrust Analysis of Intellectual Property Rights at the FTC and DOJ 
Douglas H. GinsburgJoshua D. Wright
George Mason University - School of Law, Faculty, George Mason University - School of Law, Faculty
7 102 The Practice of Promise and Contract 
Liam B. Murphy
New York University (NYU) - School of Law,
8 102 Limits of Procedural Choice of Law 
S.I. Strong
University of Missouri School of Law
9 91 Promises and Expectations 
Florian EdererAlexander Stremitzer
Yale University - School of Management, UCLA School of Law
10 71 Of Bitcoins, Independently Wealthy Software, and the Zero-Member LLC 
Shawn J. Bayern
Florida State University - College of Law

RECENT HITS (for all papers announced in the last 60 days) 
TOP 10 Papers for Journal of LSN: Contracts (Topic)  

December 13, 2013 to February 11, 2014

RankDownloadsPaper Title
1 162 The Contract Management Body of Knowledge: Understanding an Essential Tool for the Acquisition Profession 
Steven L. SchoonerNeal J Couture
George Washington University - Law School, George Washington University - Law School
2 146 The Two-Contract Approach to Liquidated Damages: A New Framework for Exploring the Penalty Clause Debate 
Michael Pressman
University of Southern California,
3 102 The Practice of Promise and Contract 
Liam B. Murphy
New York University (NYU) - School of Law,
4 97 Non-State Law in the Hague Principles on Choice of Law in International Contracts 
Ralf Michaels
Duke University - School of Law
5 94 Private Law: Commutative or Distributive? 
Dan Priel
York University - Osgoode Hall Law School,
6 91 Promises and Expectations 
Florian EdererAlexander Stremitzer
Yale University - School of Management, UCLA School of Law
7 70 Forward: Review of Baird, Eisenberg & Bix on Contract Doctrine 
Lisa Esther Bernstein
University of Chicago - Law School
8 67 Sovereign Pari Passu and the Litigators of the Lost Cause 
Joseph Cotterill
Financial Times
9 67 Unpopular Contracts and Why They Matter: Burying Langdell and Enlivening Students 
Jennifer Taub
Vermont Law School
10 56 Expressive Remedies in Private Law 
Andrew S. Gold
DePaul University - College of Law

February 11, 2014 in Recent Scholarship | Permalink | TrackBack (0)

Monday, February 10, 2014

GLOBAL K: Crazy Ungenerous Arbitration Clauses

Vonage America, part of Vonage Holdings with operations in the United States, Canada, and the United Kingdom, has encountered judicial hostility to the rather ungenerous arbitration provisions in its  Terms of Service (“TOS”) agreement. See Merkin v. Vonage America Inc. A class action suit filed in California state court in September 2013 (and later removed to federal district court for the Central District of California) charges that Vonage, a voice over Internet company, billed its customers for a monthly “Government Mandated” charge of $4.75 for a “County 911 Fee,” despite the fact that no government agency mandated such a fee. The suit claims violations of the California Unfair Competition Law, Cal Bus. & Prof.Code §§ 17200, et seq., obtaining money under false pretenses contrary to Cal.Penal Code § 496, violations of the Consumer Legal Remedies Act, Cal. Civ.Code §§ 1750 et seq., fraud, unjust enrichment, and money had and received.

 

In December 2013, Vonage moved to compel arbitration under the mandatory arbitration provision in the TOS, and to dismiss or stay the case. Vonage contended that every customer who signs up for Vonage services is required to agree to the TOS as part of the subscription process, whether that process is performed online at Vonage's website, or by phone with Vonage sales personnel. The court considered it to be “of particular importance” that the TOS changed repeatedly since the two named plaintiffs signed up in 2004 and 2006. The April 2004 version provided

 

. . . Vonage may change the terms and conditions of this Agreement from time to time. Notices [of changes in the TOS] will be considered given and effective on the date posted on to the “Service Announcements” section of Vonage's website. . . . Such changes will become binding on Customer, on the date posted to the Vonage website and no further notice by Vonage is required. This Agreement as posted supersedes all previously agreed to electronic and written terms of service, including without limitation any terms included with the packaging of the Device and also supersedes any written terms provided to Retail Customers in connection with retail distribution, including without limitation any written terms enclosed within the packaging of the Device.

 

The court noted that Vonage modified the TOS 36 times between April 2004 and October 2013 without providing notice to its customers other than posting changes to the TOS on its website. And how it grew! The court estimated that the 2004 version consisted of some 7,500 words organized into 6 sections, while the current 2013 version consists of 13,000 words organized in 18 sections. Still, Vonage insisted that each version contained a mandatory agreement to arbitrate and a mutual waiver of the right to bring or participate in a class action. For example, the current version of the TOS contains a provision that states:

 

Vonage and you agree to arbitrate any and all disputes and claims between you and Vonage. Arbitration means that all disputes and claims will be resolved by a neutral arbitrator instead of by a judge or jury in a court. This agreement to arbitrate is intended to be given the broadest possible meaning under the law.

 

The current version of the TOS also contained language restricting the consumer from bringing claims “as a plaintiff or class member in any purported class or representative proceeding.” (The provision purported to restrict both the consumer and Vonage, but the operative language of the restriction clearly applied lopsidedly to the consumer.) Naturally, Vonage took the position that the TOS arbitration provisions covered the individual plaintiffs' claims and barred them from proceeding in a representative capacity.

 

In response, the plaintiffs argued that they never agreed to the TOS, but the court could not countenance this. Vonage had shown that service sign-up could not be completed, nor could a customer use the service, without accepting the TOS. The best the Plaintiffs could do was to say that they did not “recall ever clicking on an ‘I agree to the Terms of Service’ button, or something similar to that.” Clearly, this was insufficient in the face of clear design information. Further, if the argument is simply about never reading the clickwrap language, the court made it clear that “failure to read a contract is no defense to [a] claim that [a] contract was formed. Moreover, courts routinely enforce similar “clickwrap” contracts where the terms are made available to the party assenting to the contract,” citing Guadagno v. E*Trade Bank  and Inter–Mark USA, Inc. v. Intuit, Inc.

 

The plaintiffs’ ultimate position, however, was that in any event the TOS was unconscionable, and therefore unenforceable under California law, relying on the Ninth Circuit’s 2013 decision in Kilgore v. KeyBank, Nat. Ass'n, which in turn relied upon the Supreme Court’s 1996 decision in Doctor's Assocs., Inc. v. Casarotto. The import of these cases was that generally applicable contract defenses – including fraud, duress, or unconscionability – were available to invalidate an arbitration agreement without contravening the mandate of the Federal Arbitration Act to counteract “widespread judicial hostility to arbitration agreements” and to reflect “a liberal federal policy favoring arbitration,” as the Supreme Court noted in its 2011 decision in AT&T Mobility LLC v. Concepcion.

 

On the issue of unconscionability, the parties launched into an extended debate as to which version of the TOS was relevant to the argument – the version as of the date of sign-up, or the current version, which was arguably more “consumer friendly.” The court swept all of this aside, declaring that it was “not necessary to resolve which version of the TOS controls for purposes of the unconscionability analysis. Even assuming that Vonage is correct and the current (allegedly more consumer-friendly) TOS is the salient version of the TOS, the Court finds that . . . the arbitration agreement contained in the current TOS is unconscionable.” Hence, the court assumed for purposes of its analysis and explanation that the current TOS governed.

 

Unlike the situation in Rent–A–Center, West, Inc. v. Jackson, the TOS did not include any provision “delegating” the issue of unconscionability to the arbitrator, despite the language giving the arbitration agreement “the broadest possible meaning under the law.” The court therefore proceeded with its own analysis. It began with the basic proposition that, per Kilgore, to be considered invalid under California law a contract must be both procedurally and substantively unconscionable. As to procedural unconscionability, the court found that the TOS evinced “a substantial degree of both oppression and surprise.” There was no dispute that the TOS was a contract of adhesion, which was the threshold inquiry. The consumer was confronted with the TOS during sign-up, and there was no real choice or possibility of negotiation. The consumer “must either accept the TOS in the entirety, or else reject it and forego Vonage services.” While there is support in older California case law for the proposition that adhesion and oppression are not identical (see, e.g., Dean Witter Reynolds, Inc. v. Superior Court), recent Ninth Circuit case law on the subject argues that contracts of adhesion are per se oppressive. See Newton v. Am. Debt Servs., Inc. Beyond this, the court found other clear features of oppression – the company’s unilateral ability to modify the TOS, “the largely unfettered power to control the terms of its relationship with its subscribers,” the lack of any “balance of bargaining power” – and concluded that the TOS involved a high degree of oppression.

 

The second factor in procedural unconscionability analysis is the question of surprise. The court was quick to emphasize that “surprise is not a necessary prerequisite for procedural unconscionability where, as here, there are indicia of oppressiveness,” citing the 2004 California case Nyulassy v. Lockheed Martin Corp. However, the court did find that there were significant features of surprise – arbitration terms buried within a lengthy contract, no separately provided arbitration agreement, no requirement that consumers separately agree to the agreement – although there was a TOS table of contents and a bolded, cautionary instruction introducing the provision. On balance, however, the court considered the finding of surprise to be “augmented by Vonage's repeated modification of the TOS” in 36 versions updated without any prior notice to the consumers. This led to a strong showing of surprise, and the court concluded that “[b]ecause the arbitration provision involves high levels of both oppression and surprise, the Court finds a high degree of procedural unconscionability.”

 

As to substantive unconscionability, the court’s view of the pertinent case law was that an arbitration provision was substantively unconscionable if it was “overly harsh“ or generated “one-sided results.” The court found that the TOS lacked mutuality – while purporting to require arbitration of “any and all disputes between [the consumer] and Vonage,” the TOS actually carved out exceptions for any type of claim likely to be brought by Vonage, for example, small claims, debt collection, disputes over intellectual property rights, claims concerning fraudulent or unauthorized use, theft, or piracy of services. Accordingly, the court concluded that the arbitration provision lacked even a “modicum of bilaterality,” and was therefore substantively unconscionable. Given the high degree of procedural unconscionability as well, the court found that the arbitration provision was unconscionable.

 

For several reasons, severance of the offending features was not appropriate. The high degree of procedural unconscionability tainted “not just the specific carve-out provision, but also the TOS and arbitration provision more generally.” Furthermore, previous versions of the TOS as well contained a variety of provisions that were likely to operate in an unconscionable way – a forum selection provision likely to be extremely inconvenient for consumers, restrictions on the ability of arbitrators to award relief to consumers, a shortened limitations period. Finally, the repeated modifications of the TOS made it difficult for the court to determine “what the TOS would look like in the absence of the offending provision.” In light of the repeated modification of the contract, it was unclear what contractual relationship could or should be conserved.

 

Two final points of general application are worth noting. First, the implications of the case suggest a broader impact on the telecommunications sector generally. Vonage had tried to argue that the contract was not oppressive because the plaintiffs had the option to procure telecommunications services from other providers, and thus had meaningful alternatives to contracting with Vonage. The court found this argument unpersuasive, and observed, somewhat ominously,

 

Vonage presents no evidence that plaintiffs in fact had meaningful alternatives to agreeing to arbitrate their claims. At most, Vonage presents evidence that the telecommunications market is competitive. . . . But Vonage does not demonstrate that plaintiffs could have procured equivalent telecommunications services from these competitors without being required to sign a similarly restrictive arbitration agreement. Indeed, as Vonage itself points out, “a ‘sizable percentage’ of [telecommunications and financial services companies] use arbitration clauses in [their] consumer contracts.” . . .

 

One might well wonder who among Vonage’s competitors will be next up for a class action challenge. Will they be “vonaged” as well?

 

Second, the Merkin decision may raise questions about the effectiveness of ostensible “opt-out” provisions that on-line providers tout in anticipation of criticism of their subscription practices. Vonage tried to argue that the TOS was not oppressive because a provision gave subscribers the possibility of opting out of any substantive change to the arbitration provision, through the transmittal of an “opt-out notice” within thirty days of the time the TOS was modified. The Court found this claim to be unpersuasive in the absence of prior notice. As the court explained,

 

Vonage did not provide separate notice to its subscribers when modifying the TOS; modifications were instead effective at the time they were posted to the Vonage website. As such, opting out would require a subscriber to constantly monitor the Vonage website for modifications to the TOS in order to ensure that the brief thirty-day window did not elapse. Indeed, Vonage itself appears to admit that no Vonage subscriber has ever availed himself of the thirty-day opt-out. . . . In such circumstances, the right to opt-out does not act as a meaningful check on Vonage's power to unilaterally impose modifications on its subscribers and provide subscribers with a meaningful opportunity to avoid the impact of those modifications.

 

Should the Merkin court’s view of the linkage between prior notice, opt-out, and validity become widely endorsed, online merchants might well find themselves in the shocking position of being required to provide meaningful notice to their consumers if they wish to continue to oppress them. Would this be crazy . . . or crazy generous to consumers?

 

 

Michael P. Malloy

February 10, 2014 in Commentary, Recent Cases | Permalink | TrackBack (0)